The Five Rules for Managing J Curve Investments
In my last post I discussed the importance of understanding how many J Curve investments you’re undertaking within your company at any given time. This post will address how to manage the 3 phases of a J Curve investment and cover the 5 rules for managing J Curves.
J Curve investments are vital to entrepreneurial success, so it’s important to actively manage them. The trick is to clarify and quantify the objectives, timelines and success of each J Curve investment during the J Curve, instead of afterward. This provides your executive team with a clear understanding of the status and performance of each, and empowers them to make real-time decisions using real-time information.
By actively managing your J Curves, you reduce your risk in each and help to remove the emotional connections that can often cloud good business judgment (when things go wrong).
The 3 Phases of J Curve Investments
Phase 1 – Investment
J Curve investments obviously require an outlay of capital for a projected future return, so every J Curve starts out with an investment. This is the innovation stage, where companies and product development teams consume time, effort and resources to create or purchase something that should improve the future value of the business.
The challenge with innovation is that, regardless of how carefully it’s planned, it typically takes twice as long and costs at least twice as much as projected … while carrying the risk that the investment might not pan out.
Company size doesn’t typically affect the challenge of the innovation stage – even the biggest companies can struggle with the innovation. Remember Microsoft’s challenges with creating Vista? Over three years into development they ended up scrapping the entire operating system and starting over.
Phase 2 – Catch Up
The intent of a J Curve is that after the phase 1, the investment will start to yield benefits. While the lifetime cash flow of the investment is still negative (investment phase net cash flow drain is higher than the catch up phase net cash flow gain), the overall cash drain is reducing. This is phase 2 or the “Catch Up” phase.
If a J Curve never makes the turn into Phase 2, Catch Up, it will begin a downward course called a ski slope. When a J Curve investment enters a ski slope, it’s time to abandon it and write off the investment.
Identifying a ski slope is more an art than a science, so there aren’t hard and fast rules for determining how and when to enter the catch up phase. But if you determine that you’re on a ski slope, you should abandon the J Curve in every instance.
This isn’t always an easy decision because people become emotionally attached to certain J Curves. Mitigate this risk by focusing your people on getting through the Risk Zone as fast as possible, and have everyone understand that if you decide that you’re on a ski slope, you’ll write off the investment.
Phase 3 – Blue Sky
Once the gains of the catch up phase exceed the drain of the investment phase, the investment is cash flow positive. The investment has now entered the “Blue Sky” phase. This is the goal of all J Curve investments.
Rules for Managing J Curve Investments
While the time and costs of moving through the Risk Zone is different for every J Curve investment, there are 5 rules that can help you better manage them and prevent them from going awry.
1. Measure and manage depth and breadth of the valley
Be prepared for the valley between phase 1 and phase 3 to be deeper and wider than anticipated. Encourage open discussions about costs and timeframes, and create an environment where new ideas are welcomed.
2. Create and manage a plan to quickly move from phase 1 to phase 3
Focus on the critical transition between the innovator and the implementer by using clear communication, documentation, and procedures. And beware of innovators who will not let go of their baby!
3. Do NOT become emotionally connected to a J Curve
Watch out for ski slopes, and (again), emotional arguments to keep them going. Examples are sunken costs and people management.
4. Do NOT take on too many macro J Curves at once
Identify, prioritize, and stagger J Curves. Understand how many your company can handle at one time. Understand “aggressive” versus “passive” introduction, and ask two questions when considering any new J Curve:
- Will it benefit the business?
- Is now the right time?
It’s important for mid-market CEOs to understand how many J Curves they’re currently undertaking and the status of each, because J Curves cost more than just the short-term drain on cash flow, return, and profit; they absorb substantial “executive head-space” and opportunity cost.
5. Establish a J Curve register
The register will track the number of J Curve investments active in the business, along with the phase of each and the projected date to enter into the next phase. This is critical for senior management to track, as it’s best to stagger the phases of J Curves so you don’t have too many in phase 1 or 2 which can drain substantial capital, executive mind space and opportunity cost.
Maintain the register in a spreadsheet, and update it every 30 days. The register isn’t a project management system; it’s a higher level view of all strategic investments in the business.
By carefully planning, managing and tracking the progress of your J Curve investments, you can avoid the serious pitfalls that can sink even a good company.